The business secretary is upbeat about the prospects for the sector at the launch of the new Toyota Auris in Derby

Vince Cable at the launch of the new Auris in Derby with Toyota Europe's Didier Leroy and UK boss Katsunori Kojima. Photograph: Fabio De Paola For The Observer for the Observer Fabio De Paola For The Observer/Observer

Car manufacturers love a glitzy product launch, but the ceremony to welcome a new model at Toyota's Derby plant last week was modest by industry standards. Nonetheless, the obligatory dry ice, flashing lights and thumping music struck a rare celebratory note during a difficult year for automotive groups.

"I think this is the best product we have ever had," says Tony Walker, Toyota's deputy head of UK production, gesturing towards two new Toyota Auris cars that have just received an approving inspection from guest of honour, business secretary Vince Cable.

One of the vehicles is an inadvertent reminder of the industry's difficulties. It is a left-hand drive model, ready to be exported to a continental market in freefall. While the homegrown likes of Jaguar Land Rover (JLR) are still enjoying massive sales increases, it is the big producers such as the Japanese triumvirate of Toyota, Nissan and Honda – and US-owned Vauxhall – that underpin one of the UK's most successful export industries.

"We rejoice in the success of the premium carmakers, but the UK has to have volume carmakers or the suppliers cannot survive," says Walker. "They need the volume to have a business."

Yet at the moment it's widely agreed that Europe's carmakers have too many factories geared to high demand and not enough customers buying what they produce. Fiat boss Sergio Marchionne has called it "carmageddon". Sales in Europe have fallen for 12 consecutive months, exacerbating the financial strain for automotive groups whose manufacturing operations are tailored to a pre-credit crunch market.

Western European factories churned out just under 16m cars and vans in 2007, but the total this year will be 12.5m, according to analyst IHS Automotive. Against this backdrop, Ford announced the closure of three European sites last month, including a Transit van plant in Southampton and a panel-stamping operation in Dagenham, with the loss of up to 1,400 jobs. Peugeot has announced plans to shut a plant in Paris, while General Motors is expected to close a site in Bochum, Germany.

Toyota's European operations are not on the critical list, says Walker, because the company took its medicine in 2010, shedding 800 jobs: "We took a lot of our countermeasures earlier. We have already restructured to that low level."

And, Southampton and Dagenham aside, UK-based car manufacturers are set for a good year. The Vauxhall car plant at Ellesmere Port in north-west England escaped closure after securing work to build the next generation of Astra cars, while JLR has moved to a 24-hour production line in nearby Halewood in order to cope with demand. According to AutoAnalysis, a research company, Britain will produce 1.6m cars this year – an increase of 19% on 2011. Walker, a UK car industry veteran who started his career at Ford in 1977, says the British environment has been transformed. "We have got the main things right, like quality, productivity, flexibility," he says. "All the issues of bad equipment, bad industrial relations, bad management got swept away. Those who could not modernise closed."

Car manufacturers are also more responsive to demand, tailoring cars to customers' needs before construction begins. "That sort of thing was unheard- of. As a country we used to churn them out, stick them in fields and discount them to get rid of them," Walker says.

But some experts wonder whether the UK can remain immune to the eurozone crisis. About half of all exported, UK-made cars go to the eurozone. David Bailey, a professor at Coventry University business school, says that signs are already emerging of some impact on manufacturing activity: a temporary one-week closure at Ellesmere Port; the looming redundancies at Southampton and Dagenham; the introduction of a four-day week for some staff at Honda's Swindon plant.

"The state of the European market will catch up with us at some point, as it has already with Ford, Honda and [Ellesmere Port owner] General Motors," says Bailey. "Given that 45% of UK car exports go to the eurozone, it will have an impact."

Bailey adds, however, that manufacturers such as JLR have made shrewd moves in targeting developing markets such as China, providing a sales outlet when Europe began to suffer: "What is benefiting the UK is that British producers have looked beyond the eurozone."

David Raistrick, a manufacturing expert at Deloitte, predicts that British sites will overcome the eurozone crisis, with new workforce deals at Honda and Vauxhall underlining the flexibility of British car workers. "The UK is not a cheap place to build cars," he says. "It is far cheaper to go and build in a low-wage economy than in the UK, you would think. But you need fewer people to build a car if you have efficient production facilities, so the UK ticks all the right boxes." He adds: "The industry will go from strength to strength here. The 1.6m [UK production total for 2012] will keep rising because a lot of the world's biggest carmakers are realising that the UK is a smart place to build cars."

Cable, who played a role in the negotiations that took the next-generation Astra to Ellesmere Port, believes the long-term future is bright. A Vauxhall owner himself, he reels off the UK investments that have been announced by car manufacturers over the past 12 months, from Ellesmere Port to the Toyota plant in Burnaston, south of Derby.

"All the big car producers have found the UK a good place to do business, with a flexible and co-operative labour force," he says. Alluding to the French government's plans to rescue Peugeot with a €7bn state package, he adds: "The government is supporting the industry in the right kind of way, not making open-ended subsidies and investments of the kind that you get in France." That support includes backing for suppliers, investment in low-carbon vehicles, a new tax credit for research and development and a £341m investment in automotive companies from the government's Regional Growth Fund.

After the Derby launch, Cable admits that Ford's closure of the Southampton van plant is "unambiguously bad news", but welcomed the announcement that its Dagenham site will build a next-generation diesel engine, with associated design work for its technical centre in Basildon and extra investment at the Bridgend investment plant in north Wales. "It was good news in the long term for Ford's future in the UK," he says.

Cable acknowledges that the downturn in the eurozone could cause problems for an industry that is one of the foot soldiers in the government's "march of the makers", which is seeking to generate more economic growth from export-led manufacturing. "We keep a weather eye on all of these things," he says. Like Walker, Cable was a ringside witness of the British car industry in its more troubled days, as a special advisor to then industry secretary, the late John Smith, in the 1970s.

Drawing on that period, he says he is unconcerned by the fact that Britain's car factories are foreign-controlled, from Indian-owned JLR to Volkswagen's Bentley brand.

"I am most emphatically not nationalistic about ownership," he says. "We need to cast our minds back to the car industry in the 1970s when we had more indigenous ownership through British Leyland. It was seriously dysfunctional and in danger of becoming a joke."

Having spent the morning with Toyota executives, Cable brings the argument full circle, describing the establishment of a Nissan plant in Sunderland in 1986 as turning point: "What restored credibility was investment from the Japanese." Another reason for British manufacturers to look beyond Europe.